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Market Failure and Environment

Markets have been the cause of an unbelievable amount of progress in the world and I am a firm believer in the power of the market. However, there are also situations in which market failure can arise and we have to try to find the best solution to help mitigate that failure. So, when looking at climate and environmental issues we can ask ourselves if the market has done everything it can to prevent damage? While I would assert that the market has allowed for incredible growth and innovation within the energy market, I want to point out a couple of reasons as to why market failure may exist in our energy economy.

A common reasons for market failure is the concept of externality. This is the idea that there exists some consequence (can be positive or negative) to peoples that did not choose to have those consequences. Another way we can think about this is through the idea of unintended consequences which means that an act may have lead to the desired result, but some unintended consequences resulted. I think a strong case exists that this is very much alive in the energy market. We produce all kinds of power to fuel a growing economy, and often we choose to use the cheapest fuel source that can achieve our output desires in an effort to make the best economic return. However, in the process we have many externalities and unintended consequences (greenhouse emissions, oil dependence, etc).

I think one of the primary reasons we have had difficulty in correcting the externality concerns in the market is because of what is called inter-temporal allocation. This is the idea that we make decisions today which have impacts on future peoples, whom have no voice in the present day decisions. I imagine that this is a powerful obstacle to overcome because we do not necessarily see the impacts of our energy choices everyday. It takes a forward think person to accept that they must change now, which may be a sacrifice, in order to benefit someone in the future. This is why I think the political mantra that gets thrown around about “our grandchildren” is used so much, and we see all kinds of examples of this. That phrase tried to find a connection between us today and the future generations.

Obviously, if we accept these two ideas then we may want to think about how to solve them. How can we limit externalities and how can we change the perspective of decisions made today? Think about whether in your experience, it is better to rely on government regulations or market forces to help solve these issues. Better could mean more feasible, more efficient, more ethical, etc. We will explore some of this thought process next week.